Greater New Orleans

Democrats drop millionaires tax in year-end dispute

Democrats backed away from their demand for higher taxes on millionaires as part of legislation to extend Social Security tax cuts for most Americans on Wednesday as Congress struggled to clear critical year-end bills without triggering a partial government shutdown.

Republicans, too, signaled an eagerness to avoid gridlock and adjourn for the holidays. With a bipartisan $1 trillion funding bill blocked at the last minute by Democrats, GOP lawmakers and aides floated the possibility of a backup measure to run the government for as long as two months after the money runs out Friday at midnight.

In a written statement late Wednesday, White House Communications Director Dan Pfeiffer said the administration objected to several environmental, financial and other provisions in the mammoth spending bill and said Congress should approve a short-term spending measure to avoid a federal shutdown and give lawmakers time to iron out their final disputes.

With time beginning to run short, Senate Majority Leader Harry Reid, D-Nev., met with President Barack Obama at the White House, then returned to the Capitol and sat down with the two top Republicans in Congress, Speaker John Boehner and Sen. Mitch McConnell of Kentucky.

Taken together, the developments signaled the end game for a year of divided government -- with a tea party-flavored majority in the House and Obama's allies in the Senate -- that has veered from near-catastrophe to last-minute compromise repeatedly since last January.

The rhetoric was biting at times.

"We have fiddled all year long, all year," McConnell complained in a less-than-harmonious exchange on the Senate floor with Reid. He accused Democrats of "routinely setting up votes designed to divide us ... to give the president a talking point out on the campaign trail."

Reid shot back that McConnell had long ago declared Obama's defeat to be his top priority. And he warned that unless Republicans show a willingness to bend, the country faces a government shutdown "that will be just as unpopular" as the two that occurred when Newt Gingrich was House speaker more than a decade ago.

It was a reminder -- as if McConnell and current Speaker John Boehner of Ohio needed one -- of the political debacle that ensued for Republicans when Gingrich was outmaneuvered in a showdown with former President Bill Clinton.

At issue now are three year-end bills that Obama and leaders in both parties in Congress say they want. One would extend expiring Social Security payroll tax cuts and benefits for the long-term unemployed, provisions at the heart of Obama's jobs program. Another is the $1 trillion spending measure that would lock in cuts that Republicans won earlier in the year. The third measure is a $662 billion defense bill setting policy for military personnel, weapons systems and the wars in Iraq and Afghanistan, plus national security programs in the Energy Department.

After a two-day silence, the White House said Obama would sign the measure despite initial concern over a provision requiring military custody of certain terror suspects linked to al-Qaida or its affiliates. U.S. citizens would be exempt.

The measure cleared the House, 283-136, with a final vote expected Thursday in the Senate.

Officials said Democrats were drafting a new proposal to extend the payroll tax that likely would not include the millionaires' surtax that Republicans opposed almost unanimously.

Republicans minimized the significance of the move. "They're not giving up a whole lot. The tax they wanted to implement on business owners was something that couldn't pass the House and couldn't pass the Senate," McConnell said in a CNBC interview.

Jettisoning the tax could also require Democrats to agree to politically painful savings elsewhere in the budget to replace the estimated $140 billion the tax would have raised over a decade.

In its most recent form, the surtax would have slapped a 1.9 percent tax on income in excess of $1 million, with the proceeds helping pay for the extension of tax cuts for 160 million workers. Senate Democrats have twice forced votes on the proposal in what officials have described as a political maneuver designed to force GOP lawmakers to choose between protecting the wealthy on the one hand and extending tax cuts for millions on the other.

The spending bill was hung up -- and there was no agreement why.

Republicans and at least one Democrat said agreement had been reached earlier in the week, but Reid disputed that and pointed to provisions relating to travel to Cuba and funding for the Commodities Future Trading Commission as examples.

"It's pretty clear to all of us that President Obama and Sen. Reid want to threaten a government shutdown so they can get leverage" on the payroll tax bill, said Boehner, noting that so far, the Senate has failed to pass legislation on the issue.

Wednesday's maneuvering occurred the day after the House passed a payroll tax extension that contained no higher taxes. That House measure drew a veto threat from Obama that cited spending cuts the White House said would harm the middle class without requiring a sacrifice from the wealthy.

The bill would extract nearly $43 billion from the year-old health care bill; extend a pay freeze on federal employees while also increasing their pension contributions and raise Medicare premiums on seniors with incomes over $80,000 beginning in 2017. It also would raise a fee that is charged to banks whose mortgages are guaranteed by Fannie Mae and Freddie Mac.

Obama's veto message also alluded to a requirement for the construction of an oil pipeline from Canada to Texas that Republicans said would create 20,000 jobs. The provision is designed to force the administration's hand, since Obama announced recently that despite three years of review under two administrations, he was putting off a decision until after the election.

The measure would permit Obama to block the Keystone XL project if he deemed its construction to be not in the national interest.

The House-passed bill also includes an extension of unemployment benefits that would scale back what is currently in place. The White House said 3.3 million people would be cut off under its terms. Another part of the bill, to block proposed regulations limiting toxic emissions from industrial incinerators, drew objections from the White House.

The legislation would avert a threatened 27 percent cut in payments to doctors who treat Medicare patients, and Obama and Democrats are willing to accept that.

David Espo of The Associated Press wrote this report. Donna Cassata, Alan Fram and Andrew Taylor contributed.